FDIC Law, Regulations, Related Acts

4000 - Advisory Opinions

Deposit Insurance for Brokered Deposits

FDIC-90-2

January 3, 1990

Jamey Basham, Attorney

I am writing in response to your letter of December 4, 1989, in
which you request our opinion as to the deposit insurance that would be
provided for certain brokered deposits which may be offered by your
client, *** .

Please be advised that the opinions expressed herein represent the
current thinking of the FDIC Legal Division staff and are not in any
way binding on the FDIC or its Board of
Directors. Staff opinions are of an
advisory nature only, and in the event of a bank closing, each claim
for deposit insurance will be determined on a case-by-case basis at
that time.

Your description of the brokered deposit offering, as I understand
it, is as follows: *** and several other registered broker-dealers will
obtain large certificates of deposit ("Master Certificates") from
FDIC-insured banks and FDIC-insured savings banks, and then sell
fractional undivided interests in those Master Certificates to
individual purchasers ("Purchasers"). The maximum amount of each
fractional interest will be $95,000.00. The brokers will offer the
Purchasers a rate of interest slightly lower than the rate on the
Master Certificates and keep the difference (the spread) as
compensation.

The Master Certificates will then be assigned to a custodian bank,
which will act as the brokers' agent and which will hold the Master
Certificates under a custodian agreement for the benefit of the
Purchasers. The custodian will maintain records reflecting the names
and dollar amounts paid by each participating broker, and in turn, each
broker will maintain records of the respective fractional interests of
those Purchasers whom they deal with. The institution which issues the
Master Certificates will make payments of principal and interest on the
master certificates to the custodian, who will pass them to the
brokers, who will then pass the appropriate amount to the Purchasers.

You request our opinion as to whether the respective interests of
the Purchasers will be insured, in light of the fact that the brokers
will be offering the Purchasers a lower rate than the rate paid by the
issuing banks on the Master Certificates.

Insurance of the Purchasers' respective interests in the Master
Certificates could be based on a "pass-through" of deposit
insurance. Under the pass-through theory, the respective interests of
several persons who participate in a single deposit through an agent or
custodian may be separately insured, up to a $100,000 per-person,
per-institution, provided that certain record-keeping requirements are
met.

Under the pass-through theory, the FDIC could insure the Purchasers'
respective claims to their specific portions of the deposit because
each individual Purchaser can trace his or her claim to a certain
portion of the account. If *** transaction is, in fact, a sale of an
undivided interest in the deposit, then we would recognize each
Purchaser's interest and separately insure it. The fact that the
brokers in this transaction are passing on less than the full amount of
interest earned on the Master Certificates might, depending on how the
deal is structured, indicate that the Purchasers were not, in fact,
owners of an undivided interest. If the Purchasers will be given the
full amount of interest paid on the Master Certificates and then return
a portion of it to the brokers, as pre-arranged consideration for the
brokers' services, then it would appear that each Purchaser hold an
undivided interest. However, if the brokers are exercising legal
control over the account by taking a cut directly off the top before
the Purchasers are in legal receipt of their fractional undivided
interest, it would appear that it is the brokers, and not the
Purchasers, who have ownership interests in the Master Certificates.

You also request an opinion on whether the individual Purchasers'
interest in the Master Certificates will be recognized for deposit
insurance purposes.

Assuming the above-discussed requirement concerning the payment of
interest is satisfied, the pass-through theory will operate to insure
each Purchaser's interest if certain recordkeeping requirements are
met.

The source of these recordkeeping requirements is 12 C.F.R.
§ § 330.1(b)(1) and (2), which provides as follows:

(1) The deposit account records of the insured bank shall be
conclusive as to the existence of any relationship pursuant to which
the funds in the account are deposited and on which a claim for
insurance coverage is founded. Examples would be trustee, agent,
custodian or executor. No claim for insurance based on such a
relationship will be recognized in the absence of such disclosure.

(2) If the deposit account records of an insured bank
discloses the existence of a relationship which may provide a basis for
additional insurance, the details of the relationship and the interests
of other parties in the account must be ascertainable
either
from the records of the bank or the
records of the depositor maintained in good faith and in the regular
course or business.

The FDIC's staff interpretation of this section requires the
possible existence of all fiduciary relationships be disclosed on the
deposit account records of the issuing banks. Additionally, while
§ 330.1(b)(2) establishes the records of the depositor as a possible
source of disclosure of the details of the custodial relationship, the
FDIC will accept the records of someone other than the depositor who
has undertaken, by contract or otherwise, to keep records on behalf of
the depositor.

As applied to your case, these rules mean that the deposit records
of the banks issuing the Master Certificates must indicate that the
account is held by "(Depositor), as agent or custodian for various
brokers, who may themselves be acting as agent or custodian for the
beneficial owners of the account." Since the records of your
custodian will indicate the names and interests of the brokers, and the
brokers' records will indicate the names and interests of the
Purchasers, the record-keeping requirements would then be satisfied.

Finally, you ask for our opinion as to whether the participating
brokers will be subject to insurance liability to the Purchasers for
principal and interest amounts. Since that is a legal issue which
involves the relationship between the brokers and the Purchasers, and
one in which the FDIC is not involved, we cannot render an opinion on
the subject. You should be advised, however, that the FDIC would pay
only the custodian bank (which is the depositor) the amount of the
insured deposits in the event one of the issuing banks fails. The
brokers and the Purchasers would have to look to the custodian bank in
order to receive those portions of the deposits to which they are
rightfully entitled.